Fixed Income
Sustainable Systematic Credit
September 7, 2021
Interest in sustainable investing is now expanding into fixed income. This paper assesses how measures of sustainability/ESG might be relevant for corporate bonds and analyzes how ESG measures can be incorporated into an investment process to achieve the joint object of maximizing risk-adjusted returns and a sustainability target.
Factor/Style Investing
Pricing Without Mispricing
July 16, 2021
We offer a novel test of whether an asset pricing model describes expected returns in the absence of mispricing. Our test assumes such a model assigns zero alpha to investment strategies using decade-old information. Prominent multifactor models do not satisfy this condition – while multifactor betas help capture current expected returns on mispriced stocks, persistence in those betas distorts the stocks' implied expected returns after prices correct.
Factor/Style Investing
What Can Betting Markets Tell Us About Investor Preferences and Beliefs? Implications for Low Risk Anomalies
June 30, 2021
We relate the low risk anomaly in financial markets to the Favorite-Longshot Bias in betting markets and provide novel evidence to both anomalies. Synthesizing the evidence, we study the joint implications from the two settings for a unifying explanation. Rational theories of risk-averse investors with homogeneous beliefs cannot explain the cross-sectional relationship between diversifiable risk and return in betting markets. Rather, we appeal to models of non-traditional preferences or heterogeneous beliefs.
Factor/Style Investing
What Can Betting Markets Tell Us About Investor Preferences and Beliefs? Implications for Low Risk Anomalies
May 13, 2021
We relate the low risk anomaly in financial markets to the Favorite-Longshot Bias in betting markets and provide novel evidence to both anomalies. Synthesizing the evidence, we study the joint implications from the two settings for a unifying explanation. Rational theories of risk-averse investors with homogeneous beliefs cannot explain the cross-sectional relationship between diversifiable risk and return in betting markets. Rather, we appeal to models of non-traditional preferences or heterogeneous beliefs.
Alternative Investing
The Tax Benefits of Direct Indexing
May 7, 2021
An investor holding a direct indexing portfolio can obtain tax benefits by harvesting losses on individual stock positions. We show that investors with allocations to hedge funds and derivatives are the most likely category of investors to have systematic short-term capital gains in their portfolios and, therefore, benefit the most from losses harvested by direct-indexing strategies. We show how tax benefits are affected by equalizing the tax rate applicable to long-term and short-term capital gains.
Factor/Style Investing
Is There a Replication Crisis in Finance?
March 5, 2021
Several papers argue that financial economics faces a replication crisis because many studies cannot be replicated or are the result of multiple testing of too many factors. We develop and estimate a Bayesian model of factor replication that leads to different conclusions, including finding the majority of asset pricing factors can be replicated.
Tax Aware
Limitation on Trader Fund Losses under the CARES Act of 2020
March 3, 2021
We explain how hedge fund investors might be affected by a limitation on excess business losses codified in recent tax legislation. In order to allocate business losses a hedge fund now must be a trader fund. After explaining the relationship between hedge fund losses and business losses, we illustrate with simple examples how the new provisions may affect hedge fund investors.
Trading
Game On: Social Networks and Markets
March 1, 2021
This paper studies how echo-chamber effects and fake news can lead to disagreement and misinformation with effects on investors’ portfolios and market prices. It presents a model how an investment idea can propagate through a social network, generating a trading frenzy with high turnover, a bubble in the price, and high price volatility. The paper also presents empirical evidence on the dramatic events related to the GameStop stock in January 2021 and discusses broader economic implications.
ESG Investing
Does ESG Help or Hurt Returns?
December 7, 2020
Combining several large data sets, we compute the empirical ESG-efficient frontier and show the costs and benefits of responsible investing.
Fixed Income
Modeling Corporate Bond Returns
December 2, 2020
We propose a new conditional factor model for corporate bond returns with four factors and time-varying factor loadings instrumented by observable bond characteristics. We find our factor model excels in describing the risks and returns of corporate bonds, improving over previously proposed models in the literature by a large margin.